Funding Options for Group Health Insurance
Some savvy employers started using self-funding decades ago, dropping the fully insured models. Despite the growing popularity of alternative funding models, this topic still needs to be clarified. We believe the need for more clarity is the most significant factor in some employers keeping the fully insured models. Hopefully, this article will lessen some confusion and ease your anxiety about alternative funding models for group health insurance.
For any type of funding model, there are three categories of expenses when managing an insurance plan; Claim, premium, and administrative.
Claim Cost - the actual cost of the medical claims throughout the year.
Premium Cost - the cost to purchase the insurance, essentially a fee for service. If this isn’t paid monthly, the carrier is not obligated to pay any medical bills.
Administrative Cost - the cost of running the plan. Processes need to be set up in order to receive medical bills, verify eligibility, apply the necessary adjustments to get the actual cost of the claim, and to send the payment back to the providers.
Below is a list of the main funding options available in the market today.
Fully Insured: What used to be the industry standard. You pick a plan or group of plans that have a price range based on the number of dependents (plan tier). The employees select the plan and tier and the employer gets a monthly bill (this includes all costs from above) for the chosen plans. The employees go to the doctor, show their ID cards, and the bills are paid by the carrier according to their plan selection. It seems simple and straight-forward, and it is. The problem comes in when the medical claims for you company are less than the claim cost you paid throughout the year. Unfortunately, most employers aren’t even aware since they don’t know how their monthly premiums are split up among the three expenses.
Traditional Self-Funding (Spec/Agg): In traditional self-funding, your company plays the role of the carrier: receive the medical bills from the provider and send them a payment. Usually, due to privacy regulations and increased labor costs, companies will hire what is known as a Third Party Administrator to do the administration work, using the companies’ money to pay the claim cost (some large companies, will have their own in-house administration, but that’s the exception). As you can see, we now have a clear distinction between the first two categories. The third cost, the premium, is where the traditional and hybrid models start to differ. In traditional self-funding, there is catastrophic coverage, known as reinsurance. Your fully insured carriers purchase this coverage as well, but as mentioned above, you just don’t know what that cost is. The reinsurance policy would reimburse the company for any medical costs over a pre-determined amount for the policy year. The main issue with this model is cash flow, as some medical procedures can be very expensive and come as quite a shock to employers. Because of this, carriers and agents created products we’ll refer to as hybrid self-funding.
Hybrid Self-Funding: As you’ve probably guessed, hybrid self-funding, is a combination of the two previous models. It goes by many names, but we’ll keep it generic. By purchasing modified versions of reinsurance policies, some carriers have made it possible to have a fixed monthly cost (like the fully insured model), but also keep the transparency and cost savings. You do give up some savings with the cost of the insurance, but for many employers the consistency of the fixed payments is worth it.
We believe each company is as different as the individuals working in them, and will have different needs. Let us work with you to figure out which is right for you. If you have more questions about funding options, or anything else, please reach out.